Republicans & The FOMC

The USD traded in a rather predictable range against the major currencies on Tuesday as the U.S. midterm elections were held. The results of the election are nearly in and it is evident that the Republicans have taken the House of Representatives and what could ensue now is a fierce debate on economic policy including government spending. On that note, the Federal Reserve will be releasing their FOMC Statement this evening and it is expected that the Fed will announce their new quantitative easing format. Whispers on the street have projected about half a trillion USD being funneled into U.S. bonds over the next few months and investors will watch attentively to see what actually transpires later today and how it is explained.

This coming Friday will see the Non Farm Employment Change numbers and the jobless situation in the States remains a lynchpin for a massive amount of sentiment regarding the future prospects of the U.S. economy. Consumer spending has been muted for the past two years and although it has stabilized they are not the numbers businesses had grown accustomed too. On that front the Federal Reserve’s actions today regarding quantitative easing are a central part of a debate that rages among economists and investors on how the U.S. economy will be affected short term and long term by another round of quantitative easing. The USD has traded to the weaker side of its range effectively for the past two months on the heels of rumors about what is likely to take place today within the Federal Reserve. The question is how much of the policy has already been consumed by investors and their respective financial institutions and what the reaction to the USD will be upon the announcement.

The U.S. will release the ISM Non Manufacturing PMI today and the ADP Non Farm Employment Change numbers. Both reports are expecting to beat the previous month’s results. Also Factory Orders statistics will be published. However the crux of the day will focus on the exact results transpiring from the election held yesterday in the States and the Fed’s FOMC Statement. Wall Street will provide an interesting barometer for traders today leading up to the Fed’s policy release. The fact that the Republicans have now put themselves in a position to bring forth policy for consideration is a legitimate change and may be looked on positively by investors.

The EUR and GBP both traded to the stronger sides of their range yesterday testing the fortitude of market participants. Construction PMI was released by the U.K. yesterday and it came in below estimates with a result of 51.6. Europe will be quiet again with data today, but the U.K. will release its Services PMI reading and the anticipated mark is 52.4, which would be slightly below the previous outcome. The EUR and GBP both held firm on Tuesday and they will be in a dollar centric mode today because of the Federal Reserve’s policy meeting from across the ocean. Tomorrow both the ECB and the BoE will respectively hold their Central Bank policy meetings. Their actions will be watched closely because of what will take place today with the Fed. The ECB conference tomorrow with President Trichet is sure to be interesting and the Bank of England’s policy will be watched closely too. The fact that the U.K. produced a slightly better than anticipated GDP report recently may give the BoE time to take more time before considering another round of its own quantitative easing.

The JPY effectively sat in place during its trading sessions yesterday under a cautious cloud. The JPY has been in an extremely consolidated range the past two weeks and appears to have found what investors consider a ‘fair value’ for the moment. The AUD continues to trade near parity with the USD and it will be more than interesting to see what happens for the Australian currency if Gold continues to be strong, but the USD finds itself suddenly with backing.

The broad marketplace has plenty of news today to take into perspective. The results of the U.S. election will raise eyebrows and tonight’s upcoming FOMC Statement will be sure to set off fireworks. Sentiment remains fragile and the potential mix for volatility today and tomorrow are there for all to see.

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